Effective for Texas government contracts entered into after January 1, 2016, businesses that contract with governmental entities must file a certificate of interested parties.
Scope. This applies to any government contract with a “value” of over $1MM or which “requires an action or vote by the governing body of the entity or agency before the contract may be signed.” There is no clarification as to the meaning of “value.” Neither is there any clarification as to application to various business arrangements which do not have signed contracts. “Contract” would include financing arrangements as well as public fund depositary agreements. Thus, credit transactions are covered (e.g. school bus finance lease, loans to purchase vehicles, etc.).
For purpose of this law, “governmental entity” means a municipality, county, public school district or special purpose district or authority. The rule also applies to state agencies. The term “business entity” means any entity recognized by law through which business is conducted. This would include banks.
Rulemaking. The law (Section 2252.908 Gov Code) gives the Texas Ethics Commission the authority to promulgate rules to implement it including authority to prescribe the disclosure form, which it has done.
Process. The law and rules require the following steps:
- Business entity submits a disclosure of interested parties to the Texas Ethics Commission (TEC). This is an online form, completed electronically.
- Business entity prints a copy of the completed form, which will include a certification of filing from the TEC with a unique certification number.
- Authorized agent of the business must sign the printed copy of the form and have it notarized.
- Completed form with certification of filing must be filed with the governmental entity or state agency.
- The governmental entity or state agency notifies the TEC, using the TEC’s filing application, of the receipt of the disclosure form not later than the 30th day after the date the contract binds all parties to the contract.
- TEC posts the completed form to its website within seven business days after receiving notice from the governmental entity or state agency.
Contents of Business Disclosure. The business disclosure must include a list of each “interested party” of the business. “Interested Party” includes a person who has a controlling interest or who “actively participates in facilitating the contract or negotiating the terms of the contract.” This includes a broker, intermediary, adviser, or attorney for the business. The rules-not the statute-define “controlling interest.” This includes an ownership interest that exceeds 10%, directors if the board consists of not more than 10, and the four most highly compensated officers. The rules clarify that an intermediary is one who actively participates in the facilitation or negotiation who–
- Receives compensation from the business entity for his participation
- Communicates directly with the governmental entity or state agency on behalf of the business entity AND
- Is NOT an employee of the business entity.
Impact on Contract. The law says that the governmental entity or state agency “may not enter into a contract” unless the disclosure of interested parties is made. This creates the question of whether or not a contract entered into without such disclosure is void or voidable or effective regardless of the filing.
Impact on Banks. This new law would appear to apply to all public fund agreements. Although it is difficult to determine the “value” of such agreements, they are acted on by the governmental entity. A bank’s cashier/COO who negotiates such an agreement would not be an intermediary under the rules.
Auto-Renew Contracts. Public fund deposit agreements are highly regulated. The Local Government Code, chapters 106, 116, and 117 apply. Contract terms can be five years for counties and court funds and up to four for municipalities. School district contracts are regulated by chapter 44 of the Education Code. An auto renewing contract would appear to violate the contracting provisions of Texas law applicable to these governmental entities.
Potential Issues. There is no definition of “value.” Since the law captures contracts where there is action by a governing board, this issue does not appear to be a significant one for banks.
Next, must the agreement be signed by both the governmental entity and the business? There are many arrangements that are not subject to such an agreement. Right now, the definition of contract does not require both to sign.
“Intermediary” is defined by using the language of the statute without clarifying the meaning of “actively participates in the facilitation of the contract.” It explicitly can include an attorney according to the statute. Would this include drafting the agreement for a business? To be safe, include the bank’s attorney as an intermediary if there is any negotiation of terms to the agreement.
For more information contact: Karen M. Neeley.
Additional information on House Bill 1295.